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Monthly Market Monitor - July 2011

Market Indices1JulyYear-to-Date
S&P 500-2.03%+3.87%
MSCI EAFE-1.57%+3.69%
MSCI Emerging Markets-0.38%+0.65%
Barclays U.S. Aggregate Bond+1.59%+4.35%
Barclays Municipal+1.02%+5.48%
Barclays US Corporate High Yield+1.16%+6.19%

July was a very challenging month for the equity markets, particularly in US and Europe, as worries over US and Greek sovereign debt issues weighed heavily on the markets and concerns about the global economic recovery persisted. In the US, fears that Congress might fail to reach a deal that would raise the debt ceiling before August 2nd had only begun to subside by the last trading day of the month. Investors also feared that even if a deal were reached, it may not be enough to preclude a downgrade by S&P, who, on 7/15, put US sovereign debt on CreditWatch with negative implications. Yet, fixed income markets were the winners for this past month. Despite a weak labor market, reduced liquidity from the end of QE2 and political uncertainty over the debt ceiling and fiscal reform discussions in the US, the US Aggregate, Municipal, and US Corporate High Yield fixed income indices were all up over 100bps for the month and overtook the S&P 500, EAFE and Emerging Market equity indices for the year to date. The Greece austerity vote passed on 6/29, but many feel the measures do not go far enough, and questions about the future of the Eurozone remained unanswered through July.

In the US, reported 2Q GDP came in worse than expected at a seasonally adjusted annualized rate of 1.3%, and a surprising downward revision of the 1Q GDP growth rate to 0.4% from 1.9% caused further concern over the US recovery. Disappointing economic numbers and an unemployment number that rose to 9.2% from 9.1% at the end of the second quarter, along with great uncertainty regarding the intense partisan debate in Washington over the raising of the debt ceiling and budget reforms kept many investors on the sidelines. The broad based S&P 500 declined -2.03% for the month, and at 1,292, the index finished near its 200-day moving average of 1,280. However, despite a wave of negative news throughout the month, global indicators are not showing signs of recession, and corporate earnings remain strong. While early in the reporting season, a large portion of companies have beaten their earnings per share estimates.

In US GIC sector performance, Industrials saw the greatest decline of -6.6% followed closely by Telecommunications, down -6.3%. Financials and Healthcare were also both down for the month, returning -3.5%. The two sector winners for the month were Technology, up +2.4%, and Energy, up +1.8%. Small companies were outpaced by large caps and Treasuries as investors fled to quality and safety amid market turbulence.

Non-US developed equities were down -1.57% for the month of July, as measured by the MSCI EAFE, declining less than the US but offering little solace as concerns in Europe persisted. To curb the risk that a default in Greece might lead to a dramatic selloff of European bonds, banks and the Euro currency, policymakers structured a plan by which Greece would be allowed to default in a manner that would avoid any contagion. Instability in the Middle East continued, and emerging markets were essentially flat, declining slightly by -0.38% as measured by the MSCI Emerging Markets index.

Core investment-grade US bonds, as measured by the Barclays US Aggregate Bond index, posted a gain of +1.57% in July, reversing a negative dip in June and finishing up +4.35% YTD.

Municipal returned +1.02% for the month, as measured by Barclays Municipal Index, extending the three-month positive uptrend we saw in the second quarter and finishing up +5.48% YTD. The Barclays US Corporate High Yield Index gained +1.16% in July, finishing up +6.19% YTD.

  1. Morningstar Direct

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